Daily reviews

Markets rise on hopes of progress for trade talks

It was a dynamic and anxious week in the global markets. Brexit, China, economic reports, and trade war were in focus. In fact, these are the same catalysts that were in place in late 2018, the developments on these fronts continue to drive investor sentiment. The UK Prima Minister Theresa May lost the vote in parliament for her Brexit proposal, but manages to survive a vote of no confidence. Meanwhile, the Chinese economy continued to show signs of weakening, fueling concerns over global growth.

May survives a vote of no confidence but loses the parliamentary vote

Riskier assets lifted by trade hopes

Fed’s ‘wait-and-see’ stance adds to positive investor sentiment

Economic reports continue to disappoint

Oil rises along with equities

At the same time, there are hopes for resolving trade disputed between the US and China, though the two countries are still far from making a deal. Trade optimism helped to lift stocks and indices. The dollar also gained, while the safe-haven demand for gold and yen has abated. A more cautious tone by the Fed officials added to the upside pressure on riskier assets as well.

Asian equities

The regional stocks rose decently over the course of the week as hopes for a thaw in the U.S.-China trade conflict fed investor appetites for risk assets. The optimism was due to the reports that US Treasury Secretary Steven Mnuchin discussed lifting some or all tariffs imposed on Chinese imports and suggested offering a tariff rollback during trade discussions scheduled for Jan. 30. Signs that the two sides are seeking some sort of a resolution encouraged risky trades across the globe.

Chinese Vice Premier Liu He will visit the United States on Jan. 30 and 31 for the latest round of trade talks. As a reminder, Washington and Beijing agreed to a 90-day truce in a trade war that has disrupted the flow of hundreds of billions of dollars of goods. Later in the week, China has offered to go on a six-year buying spree to ramp up imports from the U.S., in a move that would reconfigure the relationship between the world’s two largest economies. As such, the China A50 index rose from a low of 10,565 to a mid-December high of 11,127 by Friday. The next hurdle now comes at 11,155 and then at 11.210. The Hang Seng index has recovered from 26,153 to 27,307, where an early December high lies.

US equities

Positive U.S.-China trade headlines and the Fed keeping rate hikes at bay contributed to positive global risk. Dallas Federal Reserve bank president Robert Kaplan said that the Fed should wait at least “a quarter or two” before raising rates again as officials sort through a host of fresh economic risks from the government shutdown to financial market volatility. Such a combination of market-friendly central bank and signs of progress in the US-China trade relations served as a catalyst for stocks.

After a decline on Monday, the S&P500 index saw four days of robust gains and registered a one-month high at 26,755. After the initial reports on lofting tariffs, a spokesperson for the Treasury Department disputed the report, telling that neither Treasury Secretary Steven Mnuchin nor Trade Representative Robert Lighthizer made recommendations about tariffs or other aspects of the negotiations with China. But stocks held onto gains anyway as earlier reports fueled confidence that Washington may take a slightly less hawkish approach to trade negotiations going forward. The three major indices each advanced for the week and closed higher for four of the past five trading days. The Dow rose about 2.96%, the S&P 500 rose about 2.86% and the Nasdaq advanced 2.66% for the week.

Currencies

The greenback was on the offensive thanks to counter currency weakness and easing U.S.-China trade tensions. The US currency found a bid despite weaker PPI report and dismal Empire state manufacturing data – the index slumped to the lowest level in more than a year. In other economic news, U.S. mortgage applications climbed to 11-month high, Philadelphia Fed manufacturing index rebounded in January, US jobless claims fall to a 5 week-low despite government shutdown, while Fed’s Beige Book showed concerns were mounting among US businesses. As for the signals from the Federal Reserve, Clarida reinforced Fed’s mantra of US policy patience, Kaplan said Fed patience should run at least ‘a quarter or two’, while Esther George indicates it’s time for a pause from rate hikes.

Despite mixed signals, the greenback managed to keep a bullish lean against major rivals with exception to the pound that caught a bid due to lower no-deal Brexit concerns. After May lost the vote in parliament, investors started to worry about the prospects for the divorce process, but the bank of England Marc Carney said that the country’s banks can cope with disorderly Brexit. The euro saw selling pressure on weaker economic data and recession fears. European industrial production dropped sharply by -1.7% in November, the most in three years. Annual inflation down to 1.6% in the euro area, production in construction down by 0.1%, and German consumer prices fall sharply in December. Nevertheless, ECB’s Draghi said that no recession ahead for euro area despite weakness. EURUSD declined from the levels below 1.15, down to lows around 1.1350. The fact that the pair finished the week below the 1.14 handle suggests that the selling pressure could persist next week, with the 1.13 support in focus now. GBPUSD dropped dramatically on Friday against the backdrop of another bullish run in the buck, but still remained in the positive territory and registered the fifth week of gains in a row.

Commodities

After a brief drop on Monday, Brent rose during the course of the week and registered a nearly one-month high marginally below the $63 handle. The barrels moved upwards mostly as the US and China continued trade negotiations and indicated a path to a supply-trade rebalancing. The trade-related optimism supported the market despite some gloomy statements by the International Energy Agency. According to the IEA, US oil production growth combined with a slowing global economy will put oil prices under downward pressure in 2019, challenging OPEC's resolve to support the market with output cuts. The Paris-based agency has left its estimate of oil demand growth for this year unchanged at 1.4 million barrels per day, close to 2018 levels. Technically, the downside risks for Brent remain as long as the prices stay below $63. Failure to break above this level could open the way for a correction should investor optimism fade away any time soon.

After four weeks of gains, gold turned red due to a combination of a better risk sentiment and rising dollar demand. The yellow metal faced resistance marginally below the $1,296 figure and dipped to the $1,280 area, finishing the week just above the lows. Despite the correction, the bullish impetus in a wider picture is still intact, and considering the unstable environment in the global financial markets, the bullion may yet resume the ascent as soon as the current optimism abates. Besides, as the Fed is getting more ‘patient’ and ‘softer’, the dollar may lose ground again, which will also play into gold bull’s hands down the road.

In the week ahead, investors will follow the news over US-China negotiations, a new plan by Theresa May, fresh economic reports, including GDP and industrial production in China, UK unemployment rate, German industrial production and ZEW survey as well as many other releases that will set the tone for global markets.

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